Treasury

VAT update on UK emissions trading scheme

Jesse Norman: The Government is announcing today that legislation will be introduced at the earliest opportunity to allow a VAT zero rate to apply to trades in UK emissions trading scheme allowances within the VAT Terminal Markets Order (SI 1973/173) (TMO).A UK Emissions Trading Scheme (UK ETS) replaced the UK’s participation in the EU ETS on 1 January 2021. The scheme has been established to increase the climate ambition of the UK’s carbon pricing policy, while mitigating the risk of carbon leakage through free allowances.Market participants can bid for UK ETS allowances on the UK auction platform or can acquire futures contracts in UK ETS allowances on the secondary market.The TMO permits VAT zero rating for transactions on terminal commodity markets. It is seen as an important VAT trade facilitation measure by those involved in trading commodity futures contracts, where often on these markets there are very substantial volumes of transactions over short periods of time. The zero-rating relief provided by the TMO avoids the administrative and cash flow burdens of accounting for VAT and should have no effect on the VAT amount collected at the final stage of consumption.I can confirm today the treatment will be provided from the time when these important trades commenced in May.